G & M Holdings (HKG:6038) Is Reinvesting At Lower Rates Of Return

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at G & M Holdings (HKG:6038), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for G & M Holdings, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.16 = HK$45m ÷ (HK$404m - HK$130m) (Based on the trailing twelve months to June 2022).

Thus, G & M Holdings has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 7.1% generated by the Construction industry.

View our latest analysis for G & M Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for G & M Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of G & M Holdings, check out these free graphs here.

What Can We Tell From G & M Holdings' ROCE Trend?

In terms of G & M Holdings' historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 16% from 39% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

What We Can Learn From G & M Holdings' ROCE

While returns have fallen for G & M Holdings in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 22% over the last five years, so there might be an opportunity here for astute investors. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we found 2 warning signs for G & M Holdings (1 doesn't sit too well with us) you should be aware of.

While G & M Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.